by Randolph T. Holhut
Chief of AR Correspondents
May 1, 2014
ECONOMIC INEQUALITY BY THE NUMBERS
DUMMERSTON, Vt. -- French economist Thomas Piketty's new book "Capital in the Twenty-First Century" may not be the first to point out the sharp rise in inequality around the world, but the apparent effectiveness of the case he is making has conservatives in this country frightened as hell.
The average person senses that the economy is rigged against them, but hasn't had the words to describe what's happening. When they ask why the rich are making so much money while their incomes have been stagnant for more than three decades, they get told that the rich have earned their money and deserve the lion's share of all the economic gains of the last 30 years.
The reality is much, much different.
Piketty's thesis is simple. The average return on capital (profits and interest) in the 18th, 19th, and 20th Centuries has been about 5 percent, adjusted for inflation. For most of human history, annual economic growth has averaged about 0.1 percent. Not until the 20th Century did annual economic growth exceed 1 percent, and for most of the past 100 years, the growth rate was 2 percent.
The mathematical expression of this is r > g, a return on capital that's greater than economic growth.
The only exception to this pattern came between 1914 and 1975 - a period that covers two World Wars, the Great Depression, and the enormous period of global economic expansion that followed World War II.
The ratio of capital to income peaked at about 700 percent in Europe in the 19th Century. It was about 200 to 300 percent in the 1950s and 1960s. It's an indication of how entrenched the system is that it took an unprecedented series of cataclysms to put a dent in what Piketty calls "patrimonial capitalism" and create the lower rates of inequality seen between the mid-1940s and the mid-1970s.
But we have crept back to the world of patrimonial capitalism, a world dominated by inherited wealth, and as global economic growth slows, the dynamics that allow the wealthy to become more so over time stay fixed in place, as do the dynamics that prevent workers from getting a fair share of the economic gains of increased productivity that's 20 times what a worker of the early 19th Century produced.
The capital-to-income ratio is now around 600 percent, and climbing. This growing inequality is a feature, not a bug, in capitalism. In fact, Piketty says that a rising ratio is a sign that the market is working perfectly.
Piketty's solution to limit the concentration of wealth is simple and familiar, a global progressive tax on wealth. It might look like the one that the United States used to have between the 1930s and the 1970s. The top tax bracket on earned income was 91 percent during the 1940s and 1950s, and 70 percent in the 1960s and 1970s, compared to 39 percent today.
He knows this is politically unrealistic, but without some sort of remedy to reduce economic inequality, severe social disorder and disruption is sure to happen.
Again, Piketty's findings are not surprising, but he has managed to get across a fundamental point: A democracy cannot function in a society dominated by wealth where money equals power. That's a good starting point for the discussion this nation needs to have with itself.
AR's Chief of Correspondents, Randolph T. Holhut, holds an M.P.A. from the Kennedy School of Government at Harvard University and has been an award-winning journalist in New England for more than 30 years. He edited "The George Seldes Reader" (Barricade Books). He can be reached at email@example.com.